Tax morale in Australia: What shapes it and has it changed over time?

Tax morale in Australia: What shapes it and has it changed over time? Benno Torgler and Kristina Murphy WORKING PAPER 58 JANUARY 2005

TAX MORALE IN AUSTRALIA: WHAT SHAPES IT AND HAS IT CHANGED OVER TIME? Benno Torgler and Kristina Murphy Centre for Tax System Integrity Research School of Social Sciences Australian National University Canberra, ACT, 0200 ISBN 0 642 76854 4 ISSN 1444-8211 WORKING PAPER No 58 January 2005

Centre for Tax System Integrity, Research School of Social Sciences, Australian National University 2005 Commonwealth of Australia 2005 National Library of Australia Cataloguing-in-Publication data: Torgler, Benno. Tax morale in Australia: What shapes it and has it changed over time? Bibliography. ISBN 0 642 76854 4. 1. Taxation - Australia - Public opinion. 2. Taxpayer compliance - Australia. 3. Tax administration and procedure - Australia. I. Murphy, Kristina, 1973-. II. Centre for Tax System Integrity. III. Title. (Series: Working paper (Centre for Tax System Integrity); no. 58). 336.200994 If you would like to make any comments on this working paper please contact the author directly within 90 days of publication. Disclaimer This article has been written as part of a series of publications issued from the Centre for Tax System Integrity. The views contained in this article are representative of the author only. The publishing of this article does not constitute an endorsement of or any other expression of opinion by the Australian National University or the Commissioner of Taxation of the author's opinion. The Australian National University and the Commissioner of Taxation do not accept any loss, damage or injury howsoever arising that may result from this article. This article does not constitute a public or private ruling within the meaning of the Taxation Administration Act 1953, nor is it an advance opinion of the Commissioner of Taxation. ii

THE CENTRE FOR TAX SYSTEM INTEGRITY WORKING PAPERS The Centre for Tax System Integrity (CTSI) is a specialised research unit set up as a partnership between the Australian National University (ANU) and the Australian Taxation Office (Tax Office) to extend our understanding of how and why cooperation and contestation occur within the tax system. This series of working papers is designed to bring the research of the Centre for Tax System Integrity to as wide an audience as possible and to promote discussion among researchers, academics and practitioners both nationally and internationally on taxation compliance. The working papers are selected with three criteria in mind: (1) to share knowledge, experience and preliminary findings from research projects; (2) to provide an outlet for policy focused research and discussion papers; and (3) to give ready access to previews of papers destined for publication in academic journals, edited collections, or research monographs. iii

Abstract Why citizens pay their taxes voluntarily is an important question for tax administrations worldwide. Some believe it is because taxpayers are deterred from tax evasion out of a fear of being caught or penalised. Others, in contrast, suggest that factors such as the level of tax morale one has (that is, the intrinsic motivation one has to pay their tax) affects compliance behaviour. While there have been numerous empirical studies published that have explored the role of deterrence on tax compliance behaviour, very few studies have explored the concept of tax morale in any detail. This study therefore attempts to rectify this gap in the literature. If tax morale is important in determining compliance behaviour, as several researchers have suggested, then it is also important to understand what might affect one s level of tax morale. The specific aim of this paper will be to identify factors that shape or have an impact on tax morale. Using data collected from the Australian wave of the 1981 and 1995 World Values Survey, this study will demonstrate that factors such as trust and moral beliefs play an important role in shaping tax morale in Australia. Further, it will be shown that tax morale has increased significantly in Australia since the early 1980s, and that it has done so at a faster rate than many other OECD countries. Possible explanations for this increase will be discussed. iv

Tax morale in Australia: What shapes it and has it changed over time? Benno Torgler 1 and Kristina Murphy I. Introduction Why do some people pay their taxes while others do not? This question has received increased attention in the tax compliance literature over the past few decades, and a number of theories have been offered in an attempt to answer the question. For example, based on an expected utility argument, rational choice theorists have posited that people weigh up the costs and benefits of complying with the law and will disobey it if the anticipated penalties or probability of being caught are lower than the gains that could be experienced through non-compliance. In line with this economics-of-crime approach, Allingham and Sandmo (1972) presented a formal economic model showing that the extent of tax evasion was negatively correlated with the probability of detection and the degree of punishment. Many economists have since taken Allingham and Sandmo s findings to suggest that a deterrence policy should be used to enforce taxpayers to obey the law. In other words, they believe that harsh sanctions and penalties should be used to deter people from breaking the law. The problem with the deterrence view, however, is that many empirical and experimental findings show that these deterrence models predict too little tax evasion (for review see Torgler 2001a, 2001b, 2002). In fact, in many countries the level of deterrence is too low to explain the high degree of tax compliance (Dhami & al-nowaihi, 2004). Take, for example, the issue of tax compliance in Australia. The tax system in Australia is based largely on self-assessment and voluntary compliance by taxpayers. The probability of receiving an audit from the Australian Taxation Office (Tax Office) is low. The chance of being caught avoiding tax is also, on the balance of probabilities, unlikely, and if a taxpayer is caught, the culpability penalties are relatively minor when compared to the potential for economic gain. Yet it has been found that the majority of Australian taxpayers still comply with their obligations and pay their taxes with good will (Braithwaite, 2003). 1 Andrew Young School of Policy Studies, International Studies Program, USA; University of Basel, Wirtschaftswissenschaftliches Zentrum (WWZ), Basel (Switzerland) and CREMA Center for Research in Economics, Management and the Arts (Switzerland). 1

Furthermore, international research has also shown that there is a big gap between the amount of risk aversion that is required to guarantee such high compliance rates and the actual reported degree of risk aversion in the community, which has been found to be much lower (for the United States see Smith & Kinsey, 1987; Graetz & Wilde 1985; and Alm, McClelland & Schulze, 1992; for Switzerland see Frey & Feld, 2002). In addition, tax compliance experiments mostly report higher levels of income declaration than the expected utility model would predict (see Torgler 2002). Findings such as these suggest that there is more to tax compliance behaviour than the rational choice theorists would have us believe. Some researchers have argued that tax morale the intrinsic motivation one has to pay their tax can help to explain the high degree of tax compliance observed in many countries (for example, Schwartz & Orleans, 1967; Lewis, 1982; Roth, Scholz & Witte, 1989; Alm et al., 1992, 1999; Pommerehne, Hart & Frey, 1994; Pommerehne & Weck- Hannemann, 1996; Frey, 1997, 2003; Frey & Feld, 2002; Feld & Tyran, 2002). Before proceeding any further, it may first be of benefit to briefly discuss how tax morale has been defined in the past and how it might relate to other concepts such as taxpayer ethics. As indicated above, the most standard definition given in the tax morale literature is that tax morale is basically the intrinsic motivation one feels to pay their taxes. This appears to be as far as most researchers go in defining the concept and it is generally up to the reader to discern what the concept means. It appears from reading the tax morale literature, however, that tax morale is very closely linked to what some other authors refer to as tax ethics. As noted by Jackson and Milliron (1986, p. 136), concepts such as these are nebulous concepts to define. If we are to accept that these two concepts are very closely related, Song and Yarborough (1978) define taxpayer ethics as the norms of behaviour governing citizens as taxpayers in their relationship with the government (p. 444). So in other words, tax morale can generally be understood to describe the moral principles or values individuals hold about paying their tax. This will be how tax morale is defined and used in the present article. If tax morale is thought to be an explanation for why tax compliance rates are so high, it would be of interest to analyse what may shape tax morale among taxpayers. Surprisingly, 2

however, there is very little evidence available on this topic. Feld and Tyran (2002, p. 199), for example, argue: All in all, too little is known about which motivations of citizens shape tax morale. Similarly, Feld and Frey (2002) point out that: Most studies treat tax morale as a black box without discussing or even considering how it might arise or how it might be maintained. It is usually perceived as being part of the meta-preferences of taxpayers and used as the residuum in the analysis capturing unknown influences to tax evasion. The more interesting question then is which factors shape the emergence and maintenance of tax morale (pp. 88-89). Thus, the analysis of tax morale as a variable of interest (that is, the dependent variable) is rather novel in the tax compliance literature (for exceptions, see Torgler 2003a, 2003b, in press). If tax morale is important in determining compliance levels, then it is also important to understand what might affect one s level of tax morale. One of the purposes of this paper, therefore, is to identify factors that may have an impact on tax morale. It aims to do so in the Australian tax context. Australia is a particularly interesting country to analyse because there have been a number of major changes that have occurred to its tax system over the past 20 years. The most notable examples have been the introduction of the self-assessment system in 1986 and the introduction of the Goods and Services Tax in 2000. Accompanying some of these changes has been an increase in the complexity of the tax legislation and the slow movement away from command and control enforcement strategies used by the Tax Office to progressively more cooperative and customer focused strategies. Whether major changes such as these have served to increase or decrease tax morale is the focus of the present study. The study analyses a cross-section of individuals throughout Australia using the World Values Survey data of 1981 and 1995. Working with two datasets collected at two different points in time allows us to observe trends over time and it also allows us to assess the robustness of our main variables. The findings from these data suggest that tax morale has 3

in fact increased over time in Australia. Furthermore, it will be shown that variables such as trust have a positive effect on tax morale. Before considering these findings in detail, however, Section II of the paper first aims to outline some of the earlier research into tax morale. Section III then provides some information about the World Values Survey, with attention being given to the main variables used in the analysis. Section IV presents the empirical findings, Section V discusses why tax morale may have increased in Australia from 1981 to 1995 and Section VI finishes with some concluding remarks. II. Tax morale: A brief overview When analysing Swiss tax culture more than 100 years ago, Georg von Schanz (1890) stressed the relevance of taking taxpayers as partners in the tax contract between the state and its citizens (for an overview see Feld, 2003). Sixty years later, German scholars associated with Günter Schmölders (1951/1952, 1960, 1962, 1970) the Cologne school of tax psychology conducted surveys and tried to measure tax morale among taxpayers. They tried to lay the bridge between economics and social psychology, emphasising that economic phenomena should not only be analysed from the traditional point of view. They saw tax morale as an important and integral attitude that was related to tax non-compliance (see, Schmölders, 1960). For example, Schmölders (1960) analysed tax morale among selfemployed workers in Europe. He found that self-employed taxpayers had lower levels of tax morale than taxpayers who worked for other people or organisations. Strümpel (1969) also analysed tax morale among European taxpayers. He conducted an international comparative survey in Europe, which compared the tax systems between the various European countries, as well as the level of tax morale among each country s taxpayers. In that study, Strümpel found that tax morale in Germany was comparatively low, whereas in England it was comparatively high. He went on to suggest that the major difference between the German and English tax systems at the time was that the German government made use of coercive tax enforcement techniques, while the English system treated taxpayers with more respect and less control. Strümpel argued that the enforcement strategies used by the Germans served to alienate the public, which went on to negatively influence their level of tax morale. He suggested that the English system, in contrast, 4

helped to cultivate tax morale (although he did note that such a system might have offered easy opportunities for avoidance and evasion). While a large amount of preliminary tax morale research was conducted during the 1950s and 1960s by the Cologne school of tax psychology, since that time the concept of tax morale has largely been neglected by tax researchers. A number of contemporary tax compliance scholars have mentioned the concept of tax morale in their papers or books (for example, Lewis, 1982; Vogel, 1974), but only a select few have examined tax morale in any detail (see for example, Torgler, 2001a; 2003a; 2003b; in press). When assessing what factors affected tax morale among Latin American countries, Torgler (in press) found that trust in government officials, trust in others obeying the law, and numerous demographic variables predicted citizens level of tax morale. Torgler (in press) also found that the level of tax morale was associated with the degree of tax avoidance in each country. For all countries examined, tax avoidance levels and the size of the cash economy were lower among countries that had higher levels of tax morale. In another article, Torgler (2001a) discussed in more detail three key factors that he believed were important for understanding tax morale. These were (a) moral rules and sentiments (for example, norms, and guilt), (b) fairness, and (c) the relationship between taxpayer and government. Even with Torgler s work, however, recent empirical research into tax morale has been almost non-existent in the tax compliance literature. With the recent availability of new international datasets, the opportunity has therefore arisen for tax researchers to expand upon previous works, to further explore the issues and factors that may shape tax morale, and to examine the level of tax morale in many different countries around the world. As mentioned earlier, the present study uses data from the 1981 and 1995 World Values Survey to examine tax morale in Australia. Tax morale levels in Australia will be compared to those of 20 other OECD countries for the purpose of examining trends in tax morale over time. The paper also attempts to explore what factors may shape tax morale in Australia. In doing so, it will be the first time that tax morale has been examined empirically in Australia. 5

III. The World Values Survey and some of its measures 3.1. The survey The data used in the present study came from the 1981 and 1995 World Values Survey. The World Values Survey is a worldwide investigation of socio-cultural and political change. These surveys have assessed the basic values and beliefs of people around the world and have been carried out in about 80 societies representing over 80 per cent of the world s population. The World Values Survey was first carried out in 1981-83, with subsequent surveys being carried out in 1990-91, 1995-96 and 1999-2001 2. Data from these surveys are made publicly available for use by researchers interested in how views change with time. The World Values Surveys have produced evidence of gradual but pervasive changes in what people value, what their beliefs are, and what they want out of life. The findings suggest that these changes have an important impact on human behaviour and social life. For example, the surveys have pointed to the conclusion that intergenerational changes are taking place in basic values relating to politics, economic life, religion, gender roles, family norms and sexual norms (see www.worldvaluessurvey.com). For researchers who conduct and administer the World Values Survey in their respective country, it is a requirement that they follow the methodological requirements of the World Values Association. For example, surveys in the World Values Survey set are generally based on national representative samples of at least 1000 individuals 18 years and over (although sometimes people under the age of 18 participate). The samples are required to be selected using probability random methods, and the questions contained within the surveys generally do not deviate far from the original official questionnaire (for a sample of a typical World Values Survey see www.worldvaluessurvey.org). In the original 1981 wave of the Australian survey, a total of 1228 Australian citizens agreed to participate in the study. This was followed by a total of 2048 Australians agreeing to participate in the 1995 survey. 2 Data from the 1999-2001 wave is not as yet available for public analysis or use. 6

3.2. Model and variables Using data from both the 1981 and 1995 Australian World Values Surveys, our main models for predicting tax morale in Australia have the following structure: TM i 0 1 ti 2 yi 3 CTLi 4 TRi 5 RELi i (1) TM i 0 1 ti 2 yi 3 CTLi 4 TR j 5 RELi i (2) where TM i denotes the individual degree of tax morale. 3.2.1 Dependent variable The dependent variable in the present study is TAX MORALE (TM i ). The general question to assess level of tax morale from the World Values Survey and for which has been used in previous research was: Please tell me for each of the following statements whether you think it can always be justified, never be justified, or something in between: Cheating on taxes if you have the chance (answers to be given on a ten point scale 1 = never justifiable to 10 = always justifiable ). Given very few respondents would circle the numbers 4-10 on the original scale, it was decided here that the TAX MORALE variable should be recoded. The resulting TAX MORALE 3 variable was developed by reversing and recoding the ten-point scale into a four-point scale (that is, 0 = always justifiable to 3 = never justifiable ; original scores of 4-10 were recoded into 0 = always justifiable ) 4. 3 Some may criticize the way in which tax morale is measured here, as only one question has been used to measure the concept. However, in order to be consistent with previously published research it was decided that this item would be appropriate and sufficient to measure tax morale among Australians. Furthermore, when discussing the concept of taxpayer ethics a concept very similar to tax morale Jackson and Milliron (1986, p. 137) suggested that specific and individual ethical measures are probably more fruitful than aggregated measures. They based this suggestion on the finding of Lewis (1979) who failed to find a general factor of tax ethics. 7

3.2.2 Independent variables As discussed earlier, Torgler (2001a) suggested that there were a number of key factors that seemed to be important for understanding tax morale. Two of these factors included the relationship taxpayers had with their government (that is, whether they trusted them), and taxpayers moral rules and sentiments. As part of his empirical research, Torgler (in press) confirmed that these concepts predicted levels of tax morale in Latin America. In order to see whether these variables were important in understanding tax morale in Australia, three questions that most closely measured these concepts were chosen from the Australian World Values Survey and used as predictors of tax morale. Two core variables were used to explore the relationship taxpayers had with authority. One of the variables was TRUST IN THE LEGAL SYSTEM (TR i ). This variable was measured in the World Values Survey as follows: Could you tell me how much confidence you have in the legal system: is it a great deal of confidence, quite a lot of confidence, not very much confidence or none at all? (1 = none at all to 4 = a great deal ). The other variable used to explore the relationship taxpayers had with authority was TRUST IN THE PARLIAMENT (TR j ). This variable was measured in the World Values Survey as follows: Could you tell me how much confidence you have in the Parliament: is it a great deal of confidence, quite a lot of confidence, not very much confidence or none at all? (1 = none at all to 4 = a great deal ). These two variables allow us to analyse trust at the constitutional level (for example, trust in the legal system), thereby focusing on how the relationship between the state and its citizens is established, and also allow us to analyse trust more closely at the current politico-economic level (for example, trust in the parliament). 4 This scale was reversed scored so that it was consistent with the scoring formats of other questions used in 8

The relationship between taxpayers and the state can be seen as a relational contract or psychological contract, which involves strong emotional ties and loyalties. Such a psychological tax contract can be maintained by positive actions that are based on trust. If the state is seen to be acting in a trustworthy manner, taxpayers might be more willing to comply with their tax obligations. In fact, empirical evidence collected in the tax arena appears to support this claim. For example, Scholz and Lubell (1998) found that if American taxpayers trusted government or other citizens they were more likely to comply with their tax obligations than taxpayers who did not trust. Likewise, using survey data collected from Australian taxpayers involved in a long-standing dispute with the Tax Office, Murphy (in press) found that if taxpayers did not trust the Tax Office they were more likely to resist complying with their rules and decisions. These findings seem to indicate that trust is an important institution, which influences citizens incentives to commit themselves to obedience. If this is indeed the case, one would therefore expect that those who have more trust in the legal system or in parliament might also have higher levels of tax morale. RELIGIOSITY (REL i ) was an additional independent variable that was analysed in the present study. In his earlier research into tax morale, Torgler (2001a) argued that moral sentiments were important for understanding tax morale. There are many behavioural norms and moral constraints that are strongly influenced by religious motivations. Previous empirical studies published in the criminology literature, for example, have shown that states and countries with higher rates of religious membership have significantly lower violent and non-violent crime (see Hull, 2000; Hull & Bold, 1989; Lipford, McCormick & Tollison, 1993). Thus, it might also be the case that religious beliefs might influence people s habits in the area of white-collar crime. For example, religion might be found to be a restriction to engaging in tax evasion. Based on this assertion, it is therefore hypothesized that Australians who think of themselves as religious might be more likely to have higher levels of tax morale than those who do not consider themselves to be religious. the study. For example, negative responses to a question will all be denoted with smaller numbers. 9

In order to measure religiosity in the present study, the following question was taken from the World Values Survey 5 : Independently of whether you go to church or not, would you say you are: 1. A convinced atheist 2. Not a religious person 3. A religious person Earlier research into tax morale has also shown that a person s economic situation can affect their level of tax morale. Two proxies of a person s economic situation TAX RATE (t i ) and INCOME (y i ) were therefore used as predictors of tax morale in the present analysis. The effects of tax rate and income level on tax evasion are difficult to assess theoretically, and often the findings have been mixed (see Jackson & Milliron, 1986). The findings have also been found to depend on an individual s risk preference and the progression of the income tax schedule (Andreoni, Erard & Feinstein, 1998). A higher marginal tax rate makes tax evasion somewhat more profitable, but a contrary effect works depending on the risk aversion of taxpayers; tax evasion has also been found to be influenced by the type of tax schedule adopted by an administration (that is, whether it is proportional, progressive, or regressive) (see Frey & Feld, 2002). The 1995 World Values Survey data also allowed us to use another proxy for a person s economic situation. An additional question in the 1995 survey asked participants where they classified themselves in relation to SOCIAL CLASS (that is, lower class, working class, lower middle class, upper middle class, upper class). In addition to the main independent variables discussed above (that is, trust variables, religiosity, and economic situation variables), a number of additional independent variables were also used as controls (CTL) to more fully explore what factors might shape tax morale. Each of these is listed below. 5 This variable was taken and used as a continuous variable in the analyses. 10

AGE: Tittle (1980) argues that older people are more sensitive to the threat of sanctions (both social and financial) and research has consistently found that older taxpayers are more compliant (Jackson & Milliron, 1986; Wearing & Headey, 1997). It has been suggested that this is because over the years older people have acquired more material goods, have obtained greater status in their community, and have a stronger dependency on the reactions from others (Tittle, 1980). Hence, the potential costs of sanctions increase for this group. Whether this sensitivity to sanction threat among older taxpayers also affects level of tax morale is tested here. Instead of using age as a continuous variable, four age categories were formed: 16-29, 30-49, 50-64, and 65+, with the 16-29 age group being the reference group. GENDER: Do women have different levels of tax morale than men? Social psychological research suggests that women are more compliant and less self-reliant than men (for example, Tittle, 1980). Based on this past research, we would therefore expect that women should also have higher levels of tax morale than men. MARITAL STATUS: Marital status might influence legal or illegal behaviour depending on the extent to which individuals are constrained by their social networks (see Tittle, 1980). It has been argued by some that married people are more compliant than others because they are more constrained. Thus, we would predict that individuals with stronger social networks (for example, such as married people) would have higher tax morale than singles. EDUCATION: The effect of education on tax morale is not clear at all. It could be reasonably assumed that educated taxpayers are more likely to know more about tax law and fiscal connections than uneducated taxpayers, and as a result are better aware of the benefits and services the state provides for citizens. But this assumption cannot be automatically accepted. If it were to be true, however, one might expect that educated taxpayers would be more compliant with their tax obligations (see Lewis, 1982). On the other hand, educated taxpayers may be less compliant because they better understand opportunities for evasion and avoidance and might be more critical about and better aware 11

of how the state uses tax revenues. Thus far there has been almost no research conducted that examines the effect of education on a taxpayers level of tax morale. OCCUPATION STATUS: Does occupational status influence tax morale? The standard argument is that self-employed taxpayers evade more taxes. Lewis (1982) argues that selfemployed persons have higher compliance costs so taxes therefore become more visible to them. Furthermore, tax evasion might depend on the opportunity to evade or avoid taxes. Those taxpayers who are self-employed would have more opportunity to evade their taxes than taxpayers who have their taxes deducted each payday by their employers. In a European study conducted by Schmölders (1960), it was found that self-employed taxpayers had lower levels of tax morale than taxpayers who worked for other people or organisations. From this, we would therefore predict that self-employed Australians would have a lower level of tax morale than those employed by others. It should be noted, however, that the 1981 World Values Survey data did not contain a question that assessed self-employment status, so differences between self-employed workers and others could not be assessed. To test the hypothesis that self-employed Australians have lower levels of tax morale, we therefore had to rely on the 1995 data. Additional variables could have been taken from the World Values Survey and included in the present analysis. However, one of the aims of this paper was to provide a partial replication of previous research into tax morale. As a result, the tested variables have been limited to those discussed above. IV. Empirical results 4.1 Multivariate analysis In all estimations presented here, the determinants of tax morale are analysed with ordered probit models. Ordered probit analysis was chosen because ordered probit models help to analyse the ranking information of the scaled dependent variable tax morale (Kennedy, 1998). It should also be noted that as equations have a nonlinear form in ordered probit estimation, only the sign of the coefficient can be directly interpreted and not its size. Calculating the marginal effects for each coefficent is therefore a method that can be used 12

to find the quantitative effect a variable has on tax morale. Marginal effects indicate the change in the share of taxpayers (or the probability of) belonging to a specific tax morale level, when the independent variable increases by one unit. Further, in order to check the reliability and robustness of the independent variables used, we also chose to estimate a variety of models in our analysis (see Tables 1a, 1b, 2a, 2b, 3a, and 3b). This was done by varying the variables that were entered into each model. In some models, some of the independent variables were included, and in others they were excluded. Even with these variations, however, it will be seen that the same findings and conclusions can be drawn across all models. 4.1.1 1981 data So what effect do our independent variables of choice have on Australian s level of tax morale? We first present the empirical evidence for the 1981 data. Table 1a and Table 1b indicate that trust in the legal system has a positive impact on tax morale. An increase in the trust in the legal system scale by one unit raises the share of individuals stating that tax evasion is never justifiable by more than nine percentage points (see marginal effects). Further, in all models tested, trust in the parliament can also be seen to have a positive impact on tax morale. An increase in the trust in the parliament scale by one unit raised the share of individuals stating that tax evasion is never justifiable by more than 6 percentage points 6. So in other words, we observe a reliable and significant relationship between trust and tax morale. The implication of these findings in particular, is that governments and regulators may find it worthwhile to nurture trust among those they regulate (see Braithwaite & Levi, 1998; Murphy, in press). By doing so, they will be able to develop stronger relationships with those they regulate. As the results of the present study demonstrate, if there are higher levels of trust in authority then tax morale benefits positively. 6 In all the estimations in this paper we have not included trust in the legal system and trust in the parliament in the same model. This is because there is a strong correlation between the variables that makes it impossible to clearly separate the effects of the two variables if they were included in one model. Nor have we included income or an individual s tax rate in the same model for the same reasons. 13

It was also found that the more religious one is the higher their level of tax morale (see the high marginal effects between 11 and 12 percentage points for each level of religiosity). This finding therefore supports the claim made earlier that religiosity does affect tax morale in a positive way. Looking at the effect of a person s economic situation on tax morale we can see that individual tax rates have a negative effect on tax morale those who are subjected to higher tax rates have lower levels of tax morale although this effect was not statistically significant. Similarly, income level is negatively correlated with tax morale those earning more income have lower levels of tax morale. Again, however, this effect was not statistically significant. It can also be seen from Table 1a and Table 1b that some of the demographic control variables have an effect on tax morale. In all models tested, age has a positive impact on tax morale. All age groups from 30 to 65+ have significantly higher tax morale than the 16-29 year old reference group. For example, the proportion of people of the age 30-49 who report the highest level of tax morale (that is, that have a maximum score of 3) is around 12 percentage points higher than for the 16-29 reference age group. In fact, we can see that the marginal effects increase with an increase in age; the 65+ age group, for example, reports the highest tax morale of all age groups (see marginal effects). Table 1a and Table 1b also show that being a woman rather than a man increases the probability of a person stating that tax evasion is never justified by more than 14 percentage points. Hence, Australian women have significantly higher levels of tax morale than Australian men. No significant effects were found for either the marital or employment status variables in any of the eight models tested. 14

Table 1a: Ordered probit analysis showing predictors of tax morale in Australia in 1981 Weighted ordered probit Model 1A Model 1B Model 2A Model 2B Independent Variables Coeff. z-stat. Marg. Coeff. z-stat. Marg. Coeff. z-stat. Marg. Coeff. z-stat. Marg. a) Tax Rate INDIV. TAX RATE b) Demographic Factors AGE 30-49 0.31*** 3.25 0.12 0.32***3.42 0.13 0.29*** 2.98 0.11 0.30*** 3.17 0.12 AGE 50-64 0.52*** 4.33 0.21 0.57***4.73 0.23 0.46*** 3.79 0.19 0.51*** 4.17 0.20 AGE 65+ 1.02*** 5.09 0.41 1.04***5.23 0.41 0.97*** 4.85 0.39 0.99*** 4.96 0.40 GENDER (women) 0.37*** 3.61 0.15 0.42***4.02 0.17 0.36*** 3.38 0.14 0.40*** 3.76 0.16 c) Marital Status MARRIED 0.00 0.04 0.00-0.01-0.12-0.01-0.01-0.10-0.01-0.03-0.27-0.01 LIVING TOGETHER -0.33-1.40-0.13-0.38-1.54-0.15-0.27-1.15-0.11-0.32-1.30-0.13 DIVORCED 0.19 0.85 0.08 0.10 0.46 0.04 0.19 0.83 0.07 0.10 0.45 0.04 SEPARATED -0.25-0.81-0.10-0.29-0.96-0.12-0.20-0.64-0.08-0.24-0.78-0.10 WIDOWED 0.09 0.40 0.04 0.11 0.49 0.05 0.07 0.29 0.03 0.09 0.39 0.04 d) Economic Variable INCOME e) Occupation Status PART-TIME EMPLOYED 0.08 0.60 0.03 0.08 0.55 0.03 0.06 0.46 0.03 0.06 0.40 0.02 AT HOME 0.08 0.61 0.03 0.05 0.39 0.02 0.01 0.04 0.00-0.01-0.08-0.00 UNEMPLOYED 0.05 0.38 0.02 0.04 0.28 0.01 0.12 0.82 0.05 0.09 0.61 0.03 STUDENT -0.00-0.02-0.00-0.00-0.00 0.00 0.08 0.39 0.03 0.08 0.44 0.03 RETIRED 0.23 1.23 0.093 0.19 0.99 0.07 0.20 1.04 0.08 0.14 0.77 0.06 f) Trust TRUST IN LEGAL SYSTEM 0.24*** 4.64 0.09 0.24*** 4.57 0.09 TRUST IN PARLIAMENT 0.15***3.06 0.06 0.14*** 2.85 0.06 g) Religiosity RELIGIOUS 0.27*** 4.11 0.11 0.27*** 4.22 0.11 Observations 1103 1103 1083 1083 Prob(LM-statistic) 0.00 0.00 0.00 0.00 Notes: Dependent variable: tax morale on a four-point scale. The reference groups for each category of independent variable are: AGE 16-29, MEN, SINGLE, and FULL-TIME EMPLOYED. Significance levels: * 0.05 < p < 0.10, ** 0.01< p < 0.05, *** p < 0.01. Marginal effect = highest tax morale score (3). Coefficients are standardised. 15

Table 1b: Ordered probit analysis continued showing predictors of tax morale in 1981 Model Model Model Model Weighted ordered probit 3A 3B 4A 4B Independent Variables Coeff. z-stat. Marg. Coeff. z-stat. Marg. Coeff. Marg. z-stat. Coeff. z-stat. Marg. a) Tax Rate INDIV. TAX RATE -0.28-0.41-0.11-0.37-0.54-0.15 b) Demographic Factors AGE 30-49 0.30*** 2.72 0.12 0.31*** 2.87 0.13 0.30*** 0.118 2.715 0.31*** 2.87 0.12 AGE 50-64 0.44*** 2.92 0.18 0.50*** 3.30 0.20 0.44*** 0.177 2.92 0.50*** 3.30 0.20 AGE 65+ 1.07*** 4.44 0.43 1.10*** 4.49 0.44 1.07*** 0.428 4.448 1.10*** 4.50 0.44 GENDER (women) 0.41*** 3.17 0.17 0.48*** 3.64 0.19 0.41*** 0.165 3.17 0.48*** 3.64 0.19 c) Marital Status MARRIED 0.07 0.46 0.03 0.04 0.31 0.02 0.07 0.03 0.46 0.04 0.32 0.02 LIVING TOGETHER -0.06-0.21-0.02-0.15-0.53-0.06-0.06-0.02-0.21-0.15-0.53-0.06 DIVORCED 0.23 0.83 0.09 0.18 0.65 0.07 0.23 0.09 0.84 0.18 0.65 0.07 SEPARATED -0.15-0.37-0.06-0.23-0.57-0.09-0.15-0.06-0.36-0.23-0.56-0.09 WIDOWED -0.13-0.43-0.05-0.14-0.50-0.06-0.13-0.05-0.43-0.14-0.50-0.06 d) Economic Variable INCOME -0.01-0.00-0.39-0.01-0.55-0.01 e) Occupation Status PART-TIME EMPLOYED 0.11 0.59 0.04 0.10 0.53 0.04 0.11 0.04 0.59 0.10 0.52 0.04 AT HOME -0.12-0.66-0.04-0.13-0.77-0.05-0.11-0.04-0.66-0.13-0.77-0.05 UNEMPLOYED 0.02 0.12 0.01-0.04-0.21-0.01 0.02 0.01 0.12-0.04-0.22-0.02 STUDENT 0.09 0.39 0.04 0.11 0.47 0.04 0.09 0.04 0.39 0.11 0.47 0.04 RETIRED 0.10 0.43 0.04 0.01 0.02 0.00 0.10 0.04 0.44 0.00 0.02 0.00 f) Trust TRUST IN LEGAL SYSTEM 0.25*** 4.07 0.10 0.25*** 0.10 4.07 TRUST IN PARLIAMENT 0.18*** 3.00 0.07 0.18*** 3.00 0.07 g) Religiosity RELIGIOUS 0.31*** 3.97 0.12 0.31*** 3.97 0.12 0.31*** 0.12 3.97 0.31*** 3.97 0.12 Observations 777 778 777 778 Prob(LM-statistic) 0.00 0.00 0.00 0.00 Notes: Dependent variable: tax morale on a four-point scale. The reference groups for each category of independent variable are: AGE 16-29, MEN, SINGLE, and FULL-TIME EMPLOYED. Significance levels: * 0.05 < p < 0.10, ** 0.01< p < 0.05, *** p < 0.01. Marginal effect = highest tax morale score (3). Coefficients are standardised. 16

4.1.2 1995 data Table 2a and Table 2b present the findings for the 1995 World Values Survey data. The 1995 data allowed us to incorporate some additional variables into the analysis (for example, ECONOMIC CLASS and EDUCATION). As can be seen in Table 2a and Table 2b, the findings very closely mirror those of 1981, indicating that some predictors of tax morale might be stable over time. For example, higher trust in the legal system and higher trust in the parliament in 1981 corresponded to higher levels of tax morale. This was also the case for the 1995 data. Similarly, those who indicated they were more religious also had higher levels of tax morale in 1995. It can also be seen from Table 2a and Table 2b that an individual s tax rates are negatively related to tax morale (that is, those who were subjected to higher tax rates tended to have lower tax morale). The relationship, however, was not significant. Again, this finding is similar to the 1981 data. When analysing the economic situation variables, it can also be seen that the income variable has a negative effect on tax morale, although this variable was not found to be significant. Those who considered themselves to be of low economic status (that is, the reference group) were also found to have the lowest level of tax morale when compared to other class groups (this finding is indicated by the positive coefficients for the higher economic class groups). This variable, however, was not found to be a reliable predictor of tax morale. When considering the effects of the control variables, like in the 1981 data there is a tendency for age to have a positive impact on tax morale older Australians have higher tax morale. However, the coefficients in Models 7 and 8 of Table 2b show that the positive effects of age diminish when the variables TAX RATE or INCOME are included the analysis. Like in the 1981 data, women also report higher levels of tax morale than men. Unlike in the 1981 data, marital status appears to have an effect on tax morale in 1995. Compared to single people, those who are married have significantly higher levels of tax morale, thus supporting one of our hypotheses. It was also found that widowed and separated Australians had significantly higher levels of tax morale than single Australians. 17

Table 2a: Ordered probit analysis showing predictors of tax morale in Australia in 1995 Weighted ordered probit Model 5A Model 5B Model 6A Model 6B Independent Variables Coeff. z-stat. Marg. Coeff. z-stat. Marg. Coeff. z-stat. Marg. Coeff. z-stat. Marg. a) Tax Rate INDIV. TAX RATE b) Demographic Factors AGE 30-49 0.15* 1.83 0.05 0.12 1.50 0.05 0.14* 1.73 0.05 0.11 1.38 0.04 AGE 50-64 0.24** 2.23 0.09 0.23** 2.17 0.09 0.17 1.61 0.07 0.16 1.51 0.06 AGE 65+ 0.39*** 2.64 0.14 0.35** 2.35 0.13 0.32** 2.18 0.12 0.28* 1.87 0.10 GENDER (women) 0.25*** 3.93 0.09 0.25*** 4.02 0.09 0.21*** 3.33 0.08 0.22*** 3.42 0.08 EDUCATION -0.01-0.68-0.00-0.01-0.39-0.00-0.01-0.63-0.00-0.01-0.36-0.00 c) Marital Status MARRIED 0.32*** 3.91 0.12 0.31*** 3.75 0.12 0.32*** 3.82 0.12 0.31*** 3.66 0.12 LIVING TOGETHER -0.16-1.50-0.06-0.16-1.53-0.06-0.17-1.57-0.06-0.17-1.59-0.06 DIVORCED 0.08 0.58 0.03 0.05 0.38 0.02 0.09 0.65 0.03 0.06 0.47 0.02 SEPARATED 0.30* 1.86 0.11 0.28* 1.74 0.10 0.29** 1.76 0.11 0.26 1.63 0.10 WIDOWED 0.45*** 2.74 0.17 0.51*** 3.00 0.19 0.45*** 2.76 0.17 0.52*** 3.00 0.19 d) Economic Variables UPPER CLASS 0.50 1.09 0.19 0.59 1.33 0.22 0.49 1.01 0.18 0.57 1.22 0.21 UPPER MIDDLE CLASS 0.26 1.32 0.10 0.32* 1.72 0.12 0.25 1.27 0.09 0.30 1.64 0.11 LOWER MIDDLE CLASS 0.17 0.87 0.06 0.23 1.27 0.08 0.15 0.80 0.06 0.21 1.17 0.08 WORKING CLASS 0.16 0.87 0.06 0.24 1.34 0.09 0.17 0.92 0.07 0.24 1.38 0.09 INCOME e) Occupational Status PART TIME EMPLOYED -0.02-0.19-0.01-0.02-0.17-0.01 0.01 0.06 0.00 0.01 0.06 0.00 SELF-EMPLOYED 0.06 0.38 0.02 0.05 0.35 0.02 0.03 0.23 0.01 0.03 0.22 0.01 AT HOME 0.17 1.55 0.06 0.20* 1.92 0.08 0.16 1.44 0.06 0.19* 1.80 0.07 STUDENT 0.07 0.42 0.02 0.06 0.37 0.02 0.02 0.09 0.01 0.01 0.04 0.00 RETIRED 0.24** 2.16 0.09 0.25** 2.27 0.09 0.26** 2.33 0.10 0.27** 2.43 0.10 OTHER 0.10 0.76 0.04 0.15 1.08 0.06 0.08 0.60 0.03 0.13 0.96 0.05 f) Trust TRUST IN LEGAL SYSTEM 0.09** 2.28 0.03 0.09** 2.21 0.03 TRUST IN PARLIAMENT 0.07* 1.75 0.03 0.07* 1.90 0.03 g) Religiosity RELIGIOUS 0.16*** 3.45 0.06 0.17*** 3.51 0.06 Observations 1810 1807 1783 1779 Prob(LM-statistic) 0.00 0.00 0.00 0.00 Notes: Dependent variable: tax morale on a four-point scale. The reference groups for each category of independent variable are: AGE 16-29, MEN, SINGLE, FULL-TIME EMPLOYED, and LOWER CLASS. Significance levels: * 0.05 < p < 0.10, ** 0.01< p < 0.05, *** p < 0.01. Marginal effect = highest tax morale score (3). Coefficients are standardised. 18

Table 2b: Ordered probit analysis continued showing predictors of tax morale in 1995 Weighted ordered probit Model 7A Model 7B Model 8A Model 8B Independent Variables Coeff. z-stat. Marg. Coeff. z-stat. Marg. Coeff. z-stat. Marg. Coeff. z-stat. Marg. a) Tax Rate INDIV. TAX RATE -0.70-1.44-0.26-0.88* -1.85-0.33 b) Demographic Factors AGE 30-49 0.12 1.41 0.05 0.10 1.23 0.04 0.12 1.46 0.05 0.10 1.14 0.04 AGE 50-64 0.14 1.21 0.05 0.15 1.34 0.06 0.16 1.46 0.06 0.15 1.32 0.06 AGE 65+ 0.27* 1.73 0.10 0.26 1.70 0.10 0.31** 2.04 0.11 0.26 1.68 0.10 GENDER (women) 0.21*** 3.13 0.08 0.20*** 3.02 0.08 0.20*** 3.06 0.08 0.20 3.03 0.07 EDUCATION -0.01-0.69-0.01 0.00 0.02 0.00-0.01-0.46-0.00-0.00-0.04 0.00 c) Marital Status MARRIED 0.38*** 4.23 0.14 0.35*** 4.00 0.13 0.35*** 4.06 0.13 0.34*** 3.94 0.13 LIVING TOGETHER -0.09-0.81-0.03-0.10-0.91-0.04-0.09-0.86-0.03-0.10-0.90-0.04 DIVORCED 0.09 0.66 0.03 0.05 0.39 0.02 0.08 0.62 0.03 0.06 0.43 0.02 SEPARATED 0.41** 2.36 0.15 0.38** 2.20 0.14 0.40** 2.34 0.15 0.37** 2.18 0.14 WIDOWED 0.47*** 2.77 0.17 0.11 0.35 0.04 0.43*** 2.68 0.16 0.50*** 2.93 0.19 d) Economic Variables UPPER CLASS 1.17 1.51 0.44 0.03 0.23 0.01 UPPER MIDDLE CLASS LOWER MIDDLE CLASS WORKING CLASS 0.31 1.53 0.12-0.10-0.88-0.04 0.18 0.93 0.07-0.04-0.34-0.01 0.23 1.19 0.09 0.50*** 2.91 0.19 INCOME -0.02-1.25-0.01-0.02-1.37-0.01 e) Occupational Status PART TIME EMPLOYED 0.06 0.54 0.02 0.06 0.65 0.02 0.07 0.77 0.03 0.08 0.79 0.03 SELF-EMPLOYED 0.07 0.44 0.02 0.05 0.32 0.02 0.07 0.49 0.03 0.06 0.41 0.02 AT HOME 0.15 1.30 0.06 0.17 1.55 0.07 0.16 1.41 0.06 0.18* 1.65 0.07 STUDENT -0.00-0.02-0.00-0.05-0.29-0.02 0.01 0.04 0.00-0.01-0.07-0.01 RETIRED 0.23* 1.91 0.08 0.21* 1.77 0.08 0.20* 1.74 0.08 0.23* 1.92 0.08 OTHER 0.14 1.02 0.05 0.17 1.19 0.06 0.15 1.08 0.06 0.19 1.32 0.07 f) Trust TRUST IN LEGAL SYSTEM 0.08* 1.86 0.03 0.08* 1.91 0.03 TRUST IN PARLIAMENT 0.06 1.65 0.02 0.07* 1.69 0.02 g) Religiosity RELIGIOUS 0.16*** 3.20 0.06 0.15*** 3.15 0.06 0.14*** 2.98 0.05 0.15 3.16 0.06 Observations 1623 1684 1687 1684 Prob(LM-statistic) 0.00 0.00 0.00 0.00 Notes: Dependent variable: tax morale on a four-point scale. The reference groups for each category of independent variable are: AGE 16-29, MEN, SINGLE, FULL-TIME EMPLOYED, and LOWER CLASS. Significance levels: * 0.05 < p < 0.10, ** 0.01< p < 0.05, *** p < 0.01. Marginal effect = highest tax morale score (3). Coefficients are standardised. 19

When considering employment status in 1995, retired people and those keeping house appeared to show significantly higher levels of tax morale. Unlike in previous international research, there was no effect of self-employment status in the present study. Finally, there was no effect of education on tax morale. 4.1.3 Has tax morale changed over time in Australia? Thus far, we have discussed the findings of the Australian wave of the 1981 and 1995 World Values Survey independently. We have found that many of the variables that have been found to predict and shape tax morale among Europeans and Latin Americans (see Torgler, 2001a; in press) have also been found to predict and shape tax morale among Australians. For example, like in the international research, trust in government institutions (for example, Parliament, legal system) has been found to predict tax morale levels in Australia. A person s moral beliefs have also been shown to predict tax morale. Finally, a number of demographic variables were found to predict tax morale among Australians. What we have not shown so far, however, is whether tax morale in Australia has changed substantially over time. Has tax morale increased between 1981 and 1995, or has it decreased over this time period? Is this also the case for Australia? Figure 1 presents a histogram that details the distribution of tax morale scores in Australia for both 1981 and 1995. As discussed in the methodology section, those scoring higher on the tax morale scale have a higher intrinsic motivation to pay their taxes (that is, believe they should pay their taxes). From Figure 1 it can be seen that there is a difference between the two time periods. Contrary to expectation, it appears that tax morale in Australia has actually increased between 1981 and 1995. In 1995, 62 per cent of the respondents thought that tax evasion was never justifiable, compared to 48 per cent in 1981. Furthermore, when compared to responses in 1981, it can also be seen that fewer Australians in 1995 believed evading tax was always justifiable (from 34 per cent in 1981 to 17 per cent in 1995). These findings are promising as they suggest that Australians level of tax morale has in fact increased over 20

time. The belief that people should pay their taxes appears to have become stronger in Australia since the early 1980s. percentage of persons with a determinate tax morale score 70 60 50 40 30 20 10 0 0 1 2 3 tax morale 1981 1995 Figure 1: Distribution of tax morale scores in Australia for both the 1981 and 1995 World Values Surveys In order to assess whether the change in tax morale between 1981 and 1995 has been a significant change, statistical analyses were conducted on the data. An ordered probit analysis was again used, ensuring that a number of key variables were controlled for. A TIME dummy variable was created, with 1981 being the reference group in which to check for possible differences across time. In order to compensate for the fact that the number of participants in the 1995 data set was much larger than for the 1981 dataset, the observations were weighted to get an equal number of observations for each year 7. The findings are presented in Table 3a and Table 3b. 7 This was done by taking the original weight variable, and multiplying it by a constant for each survey. If the data were not weighted it could have produced biases in the pooled analysis. 21